mase because the re e upon the repurch y time between an

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Levy Corp. is an unlevered firm worth $507,000 (market value). There are 14,000 shares of stock outstanding. The company just announced that, to change the
capital structure, it will repurchase $22,400 worth of stock with borrowed fund in six months. The tax rate for the firm is 20%. If the stock market is efficient, which of
the following is correct according to MM propositions?
The stock price should not react to the repurchase because the repurchase has no impact on firm value.
The stock price will not react to the repurchase upon the repurchase is announced.
The stock price can react to the repurchase any time between announcement and implementation.
The stock price will not react to the repurchase upon the repurchase is complete.
Transcribed Image Text:Levy Corp. is an unlevered firm worth $507,000 (market value). There are 14,000 shares of stock outstanding. The company just announced that, to change the capital structure, it will repurchase $22,400 worth of stock with borrowed fund in six months. The tax rate for the firm is 20%. If the stock market is efficient, which of the following is correct according to MM propositions? The stock price should not react to the repurchase because the repurchase has no impact on firm value. The stock price will not react to the repurchase upon the repurchase is announced. The stock price can react to the repurchase any time between announcement and implementation. The stock price will not react to the repurchase upon the repurchase is complete.
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